To understand the financial services industry at the time of the financial crisis, you were well placed if you’d read Hyman Minsky. Minsky himself was ten years in his grave by then but his theories linking financial markets and the broader economy served a useful model of what was going on.
Today, that economist is Ronald Coase. If you want to know what’s going on in financial services today, he’s the man to study.
Coase was active from the 1930s all the way up to his death, aged 102, in 2013. Like Minsky, he had a practical streak – both men challenged the idea of efficient markets (enhancing their credibility among investors). Through his macroeconomic lens, Minsky attacked the notion that markets tend towards equilibrium. From a different perspective, Coase wondered why, if markets and prices are so efficient, corporate entities exist. In 1937, Coase wrote an essay, The Nature of the Firm, where he attempts to explain why some business activities sit within the control of corporate management while others are exchanged through arm’s length transactions in the marketplace.
Coase’s insight, which may seem obvious but has far-reaching implications, is that transacting is not a costless activity. In his essay he showed that the size and structure of firms, and the location of the border between internal exchange within the firm and external exchange through markets, stem from the costs of transactions. In short, firms will expand or shrink until the cost of “making” equals the cost of “buying”.
This insight explains a lot of the trends underpinning fintech.
Read on or listen to our conversation (recorded on May 25, 2021):
This conversation is available as an episode of Gain Industry Insights, a member podcast of MOI Global. (Learn how to access member podcasts.)
About This Audio Series:
MOI Global is delighted to engage in illuminating conversations on the financial sector with Marc Rubinstein, whose Net Interest newsletter we have found to be truly exceptional. Our goal is to bring you Marc’s insights into financial services businesses and trends on a regular basis, with Marc’s weekly essays serving as inspiration for our discussions.
About Marc Rubinstein:
Marc is a fellow MOI Global member, managing partner of Fordington Advisors, and author of Net Interest. He is a former analyst and hedge fund manager, most recently at Lansdowne Partners, with more than 25 years of experience in the financial sector. Marc is based in London.
About Net Interest:
Net Interest, authored by Marc Rubinstein, is a newsletter of insight and analysis from the world of finance. Enjoyed by the most senior executives and smartest investors in the industry, it casts light on this important sector in an easy-to-read style. Each post explores a theme trending in the sector. Between fintech, economics and investment cycles—there’s always something to talk about!
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